FHFA Says Costs and Risks of Proposed Principal Reduction Program Outweigh Benefits

By -

Almost 60 percent of all mortgages in the US are guaranteed by government sponsored enterprises (GSEs), and 11 million homeowners suffer from negative equity, but that wasn’t enough to convince the Federal Housing Finance Agency (FHFA) to endorse programs to write down mortgage principal for underwater borrowers. According to a recent article in National Mortgage Professional Magazine, FHFA Acting Director Edward J. DeMarco released a statement explaining that, after responding to several congressional inquiries, the FHFA would not be supporting the Home Affordable Modification Program Principal Reduction Alternative (HAMP PRA). Says DeMarco, “After extensive analysis of the revised HAMP PRA, including the determination by the U.S. Department of the Treasury to begin using Troubled Asset Relief Program (TARP) funds to make incentive payments to Fannie Mae and Freddie Mac, FHFA has concluded that the anticipated benefits do not outweigh the costs and risks. Given our multiple responsibilities to conserve the assets of Fannie Mae and Freddie Mac, maximize assistance to homeowners to avoid foreclosures, and minimize the expense of such assistance to taxpayers, FHFA concluded that HAMP PRA did not clearly improve foreclosure avoidance while reducing costs to taxpayers relative to the approaches in place today.”

David H. Stevens, president and CEO of the Mortgage Bankers Association (MBA) backed the FHFA’s decision. “FHFA has made the determination that the long-term national costs of a widespread principal reduction program are unlikely to outweigh what may be a short-term gain for a few select borrowers in certain states,” and that “we agree that principal forbearance can help borrowers realize a payment reduction in a similar way as principal reduction. It is critical to implement solutions that help the American homeowner without incurring the negative long-term impact of making credit less available and more expensive.”

Mr. Geithner Weighs In

Meanwhile, Timothy Geithner, Secretary of the U.S. Department of the Treasury, wasn’t so convinced the decision was the wisest one, and harbored concerns about the FHFA’s oppositional stance to Fannie Mae and Freddie Mac’s targeted principal reduction in loan modification programs. “Five years into the housing crisis, millions of homeowners are still struggling to stay in their homes, and the legacy of the crisis continues to weigh on the market,” said Geithner. “You have the power to help more struggling homeowners and heal the remaining damage from the housing crisis. I hope you will move to address these problems with a sense of urgency and force commensurate with the scale of the remaining challenges.”

Mr. Stevens summarized the situation and defended the FHFA’s decision by observing that “…we need to ensure that credit is available for potential homebuyers, and this is at risk with forthcoming regulations regarding the QM/Ability to Repay rule,” and that “Only when access to credit normalizes, will the housing market start growing again, and it is that market growth, and increasing home values, that will truly help underwater borrowers.”

Anna Platz is an Editor at ForTheBestRate.com, a leading mortgage rate research website, as well as the Lead Contributor to GoodCentsSavings.com, a blog about budgeting and personal finance. Anna is immersed in the world of real estate, mortgage, and home financing and is here to provide valuable resources for homeowners and soon-to-be-homeowners on buying and selling real estate, researching a mortgage broker or lender, and securing a home loan. Check back often for news, updates, and remember that you can find today's current mortgage rates at ForTheBestRate.com. My Google Profile+

Comments are closed.